HKEx small metal futures contract-investment arbitrage

SMM News: the price of non-ferrous metals rebounded V-shaped in 2020

Since the beginning of this year, the spread of the novel coronavirus epidemic has had a tremendous impact on the global financial and commodity markets. There have been sharp price fluctuations in many varieties of non-ferrous metals.

In March this year, affected by the epidemic, people were pessimistic about the future economic outlook. The RMB aluminum futures 2009 contract on the Hong Kong Stock Exchange fell all the way from about 12500 yuan / ton at the beginning of the year to 10230 yuan / ton at the beginning of April.

As the epidemic was brought under control in China, aluminum prices quickly rebounded to 11800 yuan per ton in mid-July.

The price trend of RMB aluminum futures 2009 contract on the Hong Kong Stock Exchange, data from the website of the Hong Kong Stock Exchange

In the first half of the year, aluminum price achieved a V-shaped reversal, aluminum futures contract price volatility is huge, but at the same time contains a wealth of investment opportunities.

(2) small metal futures contracts of the HKEx-good investment arbitrage tools

At present, London Metal Exchange (LME) is the largest non-ferrous metals exchange in the world, with a wide range of listed non-ferrous metal contracts and large trading scale. In 2012, the Hong Kong Stock Exchange acquired LME.

In order to expand the use of LME trading prices in Asia, particularly in mainland China, the Hong Kong Stock Exchange launched six small metal contracts based on LME official settlement prices in 2014 and 2015, respectively, including aluminium, zinc, copper and nickel, tin and lead.

In August 2019, the Hong Kong Stock Exchange launched six US dollar-denominated small metal contracts.

Details of RMB aluminum futures contract on the Hong Kong Stock Exchange

Small metal contracts listed on the Hong Kong Stock Exchange have the following characteristics:

1) the contract is small and easy to hedge

2) Cash delivery

3) double currency pricing, you can look for arbitrage opportunities

The scale of the small metal contract is relatively small, each contract unit is divided into 1 ton / sheet and 5 tons / piece, and the nominal value of the contract is 50, 000-100000 yuan, which can better meet the needs of ordinary investors.

Small metal contracts are settled on a monthly basis and delivered in cash, saving investors delivery fees and reducing transaction costs.

In addition to US dollar quotation, small metal contracts also offer a version of RMB quotation, so that RMB investors do not have to involve the issue of foreign exchange in the trading process. Companies can also avoid the risk caused by fluctuations in the exchange rate of the renminbi against the US dollar.

In addition to being easy to invest in small metal contracts on the Hong Kong Stock Exchange, there are a wide range of arbitrage opportunities waiting for investors to tap. In this paper, we focus on the cross-market arbitrage opportunities of non-ferrous metals.

Cross-market arbitrage means that investors make use of the contract price differences in different markets to buy contracts with relatively low prices and sell contracts with relatively high prices at the same time, and gain profits by closing their positions after the prices of the two markets converge.

The main types of cross-market arbitrage involving non-ferrous metals include LME non-ferrous metals contracts, Shanghai Futures Exchange non-ferrous metals contracts and Hong Kong Exchange US dollar RMB dual currency small metal contracts.

Specifications of non-ferrous metal futures contracts in the three major exchanges

At present, the specifications of non-ferrous metal contracts listed by LME are larger than those of Shanghai Futures Exchange and Hong Kong Stock Exchange, and unit conversion is needed for cross-market arbitrage between Shanghai Futures Exchange and LME.

The Hong Kong Stock Exchange small metal contracts are consistent with the Shanghai Futures Exchange contract specifications, and can directly correspond at 1:1 when carrying out internal and external arbitrage. In addition, the small metal contracts priced in RMB on the Hong Kong Stock Exchange are in the same currency as those on the Shanghai Futures Exchange, making it easier to arbitrage.

(3) case analysis of cross-market arbitrage

Take aluminum as an example, the price of aluminum abroad has been discounted at home for a long time. The spread of aluminum contracts between the Shanghai Futures Exchange and the Hong Kong Stock Exchange usually remains in a stable range. If the price difference at home and abroad widens significantly due to the impact of unexpected events, cross-market arbitrage can be carried out (sell high and buy low).

As shown in the figure below, we list the closing prices of aluminum futures 2009 contracts on the Shanghai Futures Exchange and the Hong Kong Stock Exchange from the beginning of the year to the end of June.

The data are from the websites of Shanghai Futures Exchange and Hong Kong Stock Exchange respectively.

From January 2 to March 30 of the year, the price difference of aluminum contracts between the Shanghai Futures Exchange and the Hong Kong Stock Exchange converged from 1385 yuan per ton to 935 yuan per tonne, and then widened to 2185 yuan per ton on June 30, three months later.

Judging from the historical spread, the spread of 935 yuan at the end of March is at an all-time low. If arbitrageurs enter the market at this time to make long spreads (long Shanghai Futures Exchange contracts and short Hong Kong Exchange contracts), they can enjoy the benefits of widening price spreads later.

It should be noted that cross-market arbitrage is mainly based on historical prices and statistical arbitrage, after entering the market, we should also pay attention to the market risk.

As shown in the picture, both the HKEx aluminum futures contract (above) and the Shanghai Futures Exchange contract (bottom) experienced a V-shaped reversal in the first half of the year (data from the HKEx website and Sina respectively)

(4) General introduction

As noted above, there is a wide range of arbitrage opportunities between Hong Kong Exchange small metal contracts denominated in US dollars and renminbi and Shanghai Futures Exchange futures contracts denominated in renminbi and US dollar-denominated LME futures contracts.

The launch of small metal contracts on the Hong Kong Stock Exchange has not only built a better global commodity trading platform for customers in the Asia-Pacific region, but also provided a convenient channel for domestic investors to participate in overseas non-ferrous metals investment, which is worthy of investors' attention.

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